Quick Facts

The overall competitiveness of Panama’s economy is sustained by openness to global commerce. Pro-growth reforms, including simplification of business start-ups and reduction of the corporate tax rate, have contributed to five years of notable economic expansion. The service-oriented economy continues to be an international business and banking hub.

Economic Freedom Snapshot

2016 Economic Freedom Score: 64.8 (up 0.7 point)

Economic Freedom Status: Moderately Free

Global Ranking: 66th

Regional Ranking: 13th in the South and Central America/Caribbean Region

Notable Successes: Open Markets and Business Freedom

Concerns: Property Rights, Corruption, and Labor Freedom

Overall Score Change Since 2012: –0.4

Despite some progress, the rule of law in Panama is still restrained by institutional weaknesses. Anti-corruption laws seem to have had little impact, and the judicial system remains vulnerable to political interference.

Background

President Juan Carlos Varela took office in 2014. Surveys show that poor water supplies for segments of the population, electricity shortages, and dismal conditions in public schools are top public concerns. Panama’s strong, dollar-based economy rests primarily on a services sector that accounts for more than three-quarters of GDP. About one-fourth of the population lives in poverty. Since the opening of the Panama Canal in 1914, Panama has been a strategic commercial and security hub in the Americas, with transportation, services, and banking the main engines of economic growth. By 2016, a third set of locks will enable the canal to handle post-Panamax ships, essentially doubling its capacity. The government is seeking repayment of $1 billion owed by Venezuela to Panamanian companies operating in Panama’s large import/re-export zone and to the national carrier, Copa Airlines.

Juan Carlos Varela’s efforts to recover millions that vanished during his predecessor’s administration led to early high approval levels, but now Panamanians wonder whether the anti-corruption drive was just a political vendetta. Nothing else has been done to strengthen checks and balances or improve transparency. The judicial system remains overburdened, inefficient, politicized, and prone to corruption. Protection of property rights is weak.

The top personal income and corporate tax rates are 25 percent. Other taxes include a value-added tax and a capital gains tax. The overall tax burden equals 17.7 percent of total domestic income. Government spending amounts to 27.2 percent of GDP. The budget deficit, particularly in the non-financial public sector, has widened. Public debt is at a level equal to almost half of GDP.

Earlier reforms have enhanced the regulatory framework, but the pace of reform has slowed. Licensing requirements remain time-consuming and costly. The labor market lacks flexibility, and the non-salary cost of hiring a worker is relatively high. In 2015, the IMF praised the government for reducing subsidies by increasing rates charged by the state-owned electricity company but criticized its failure to eliminate state-imposed food price controls.

Panama’s average tariff rate is 6.1 percent. Customs procedures have been modernized in recent years. There is no general screening of foreign investment. Foreign and domestic investors are generally treated equally under the law. The financial sector, vibrant and generally well regulated, provides a wide range of services. Banking continues to expand, albeit slowly.